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Pattern Energy Group Inc. (NASDAQ: PEGI ) Q1 2016 Earnings Conference Call May 9, 2016 10:30 AM ET Executives Mike Garland – President and CEO Mike Lyon – CFO Analysts Nelson Ng – RBC Capital Markets Stephen Byrd – Morgan Stanley Chris Turner – JPMorgan Ben Pham – BMO Capital Markets Frederic Bastien – Raymond James Matt Tucker – KeyBanc Capital Sophie Karp – Guggenheim Securities Michael Morosi – Avondale Partners Rupert Merer – National Bank Jeremy Rosenfield – Industrial Alliance Operator Good morning ladies and gentlemen. Welcome to Pattern Energy Group’s 2016 First Quarter Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. I would like to remind everyone that today’s discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Pattern’s risks and uncertainties related to these forward-looking statements, please refer to the company’s 10-Q which was filed May 9, 2016 and available on EDGAR and SEDAR. Now, I’d like to turn the call over to Mike Garland, President and Chief Executive Officer of Pattern Energy Group Inc. Mike Garland Thank you, operator. Good morning and thank you all for joining us today. Earlier this morning, we released our 2016 first quarter results, which you can find on our web site at patternenergy.com. We are very pleased with our first quarter results. Our primary financial metric, cash available for distribution was up 340% year-over-year to $41 million. This result puts us on track through the first quarter to achieve a full year 2016 cash available for distribution guidance of $125 million to $145 million. Our full year guidance represents built in cash available for distribution growth of 46% over our 2015 cash available for distribution, at the midpoint of the range; and we can achieve that target entirely based on the existing ownership levels at our 16 operating projects, meaning no new equity capital is required for that growth. As we anticipated and discussed during our fourth quarter call, the El Niño conditions continued into 2016 resulting in approximately 10% lower production in the period compared to our long term forecast. This was in line with our expectations. As we discussed on our call in March, the El Niño conditions will continue to impact production during the second quarter. Our 2016 CAFD, cash available for distribution guidance, takes the Q1 and Q2 impact into account. Our Met team, our meteorological team and independent parties continue to believe that the El Niño — after the El Niño, a new system referred to as La Niña, could result in higher wind speeds for our fleet in either the second half of 2016 or early 2017. This would potentially result in higher production than the long term average for the later part of the year and into 2017. For our full year guidance, we have assumed wind speeds and production at the long term average during the second half of this year. Ensuring turbine availability conditions is a core component of our approach to operational excellence, I am pleased to say that the fleet is still operating at the top end of the industry. As a result of our operating performance and the high overall quality of our assets, our projects will continue to provide investors with a stable, yet growing, base of cash flows. As such, this morning, we announced an increase to our second quarter dividend of 2.4% to $1.56 per share on an annualized basis; our ninth consecutive quarterly dividend increase. In addition, our outlook for growth remains strong and Pattern Development’s project opportunities have increased. Pattern Development remains the primary means through which we will grow our portfolio, as we strongly believe we get better value for an invested dollar from the project Pattern Development creates. Currently, our identified right of first offer lift with Pattern Development totals 1.3 gigawatts of owned capacity and represents growth of 57% to our existing portfolio. During the last two quarters, Pattern Development commenced operations at three projects, one in Canada and two in Japan, which remain on our identified ROFO list. These projects represent 115 megawatts in owned capacity. Armow, which is located in Ontario, Canada, commenced operations in late 2015, representing 90 megawatts of owned capacity. Pattern Development, together with its Japanese development partner, GPI, has also commenced operations at its first two solar projects in Japan. Futtsu Solar, a 42 megawatt solar facility, representing 15 megawatts of owned capacity on our identified ROFO list, commenced operations in March. And Kanagi Solar, a 14 megawatt solar facility, representing 6 megawatts of owned capacity, commenced operations in April. Additionally, Pattern Development is currently arranging funding for the Broadview projects, which could start construction soon. Broadview is a 324 megawatt gross capacity project and 259 megawatts in owned capacity, located in New Mexico. Once constructed, it will deliver attractively priced power directly into California, under two 20 year contracts. Each of these four projects represents quality opportunities that complement our current portfolio. As to capital raising for these and other opportunities we reiterate, we have $100 million to $150 million of liquidity to acquire projects. We do not have any current commitments, which require us to raise capital, and Pattern Development has expanded its capital resources to allow them to carry projects during periods of weak capital markets. However, we are pleased that the capital markets have improved in the last few weeks within the sector. We are hopeful that these improvements reflect the market, valuing the quality and the stability of our cash flows and our strong outlook for growth, and therefore, we will see continued improvement. However, please read these comments to mean, that at this time, we are not planning on a equity offering. This morning, we filed a prospectus for an ATM that provides us with greater flexibility access modest amounts of equity capital from time-to-time, and as appropriate, given market conditions. We view this ATM as one tool in a broader toolkit and we intend to use it judiciously for future project related investments that are accretive and other corporate purposes. Again to be clear, we do not plan on issuing under the ATM at this time, and at the current stock price. The ATM is only an option for the future. I hope, it is clear that we remain confident in and committed to our strategy. We will continue to increase our cash available for distribution from our 16 operating projects today, and grow our business primarily from drop-downs from Pattern Development. By managing our costs effectively and delivering operational and technical improvements within the current fleet, we believe we can exceed $156 million run rate, cash available for distribution target from the existing assets in the coming years. We can grow our cash available for distribution naturally, and we can be patient acquiring new projects. We will grow the portfolio, when appropriate, and with projects that are accretive to our shareholders. Our strategy is consistent with our patient, but active approach that I discussed on our last call. Patient, in the sense of not having to raise equity, when we do not want to, and also being disciplined about when we drop down assets, and maintaining the strong support of our flexible sponsor, Pattern Development. At the same time, we are active, driving continued operational improvements, managing our cost effectively and consistently looking for alternative and better ways to finance our business. We have structured the business and deployed a strategy to produce stable, sustainable cash available for distribution per share and to grow it. We have also consistently stated that we believe we can increase our long term value by migrating over time in appropriate amounts to a fully integrated independent renewable power company. We have never viewed the public company as a sidecar that funds the development business, quite the opposite. We structure the business, with internal management and no IDRs, because Pattern Energy is the growth entity. With that in mind, and as I mentioned in the March call, we continue to hold discussions with Pattern Development as to the possibility for PEGI to participate in the ownership of the development pipeline. These discussions cover, or will cover a range of items which include timing, structure, value of the fund and the funding of such transaction. It is still very early in the process, and at this stage, there is nothing to report, and there can be no assurances that any transaction will occur. As to the general market, the outlook for the next decade has never been better for renewable energy. U.S. continues to be committed to increasing the use of renewables, with the passage of long term tax production tax credit, increases in state renewable portfolio standards, such as California and Oregon going to a 50% target; 80 of the most influential corporations have pledged to buy 100% renewables for their electrical needs, and wind provided nearly all the new electricity capacity added in the first quarter. Additionally, most utilities in States are implementing coal reductions, despite the legal challenge to the clean power plant at the federal level. In the other countries we and Pattern Development are active in, Canada, Chile, Mexico and Japan; these countries have continued and increased their commitment to renewables and reducing their dependence on imported and fossil fuels. There are new bid processes under way in Mexico, Chile, and Ontario, and we expect Alberta and Saskatchewan to conduct competitive processes, as they retire coal assets. We believe our business strategy allows us to take advantage of the current strong market. Our target is to grow our existing portfolio to 5 gigawatts of owned capacity by the end of 2019, delivering stable, sustainable and growing returns to our shareholders. With that, I’d like to turn it over to Mike Lyon to review the financials in more detail. Mike Lyon Thank you, Mike. Let’s start with electricity sales. We report electricity production on a proportional basis, to reflect our ownership interest in operating projects. Proportional gigawatt hours sold increased 92% to 1,801 gigawatt hours in the first quarter 2016 compared to the corresponding period in 2015. This increase was primarily due to projects which commenced commercial operations since the third quarter, or were acquired since May of 2015. Specifically, the acquisitions of Post Rock and Lost Creek in May, as well as the acquisition of subsequent commencement of commercial operations at K2 in June, Logan’s Gap in September, and Amazon Wind Fowler Ridge in September. As Mike mentioned, the anticipated El Niño conditions continued during the first quarter, causing lower wind speeds which resulted in lower production. We expect El Niño conditions to subside during mid-2016. We expect El Niño to have less impact on wind speeds in the second quarter than we expected and experienced in the first quarter, but there will still be an impact. At present, we anticipate a reversal of El Niño conditions in the second half of 2016 or early 2017, at which point La Niña could potentially positively impact North American wind levels. Adjusted EBITDA increased 67% to $78.1 million in the first quarter of 2016 compared to the same period last year. This was primarily attributable to projects, which commenced commercial operations or were acquired since May 2015. Cash available for distribution increased 340% to $41 million in the first quarter 2016 compared to the same period last year. The $31.7 million increase in cash available for distribution, was due primarily to two items; first, additional revenues of $31.3 million, excluding unrealized loss on energy derivative and amortization of PPAs, primarily from projects which commenced commercial operations or were acquired during 2015. And secondly, an increase of $14.1 million received in cash distributions from our unconsolidated investments, when compared to the same period in the prior year, due to full operation at each of our own consolidated investments in 2016 compared to 2015. These increases were partially offset by increased expenses, primarily due to the projects which commenced commercial operations or were acquired during 2015, including increases of $7 million in project expenses, $3.4 million in operating expenses, and $3.1 million in interest expense. The increases in cash available for distribution were also offset by increased distributions through non-controlling interest of $3.2 million. This morning, we are reaffirming our guidance for the full year, 2016 cash available for distribution of $125 million to $145 million. This represents built-in cash available for distribution growth of 46% at the midpoint of the range from the current 16 projects in our portfolio. That is with no new projects and no new equity capital required. Any contributions from new projects prior to the end of 2016, would be incremental to our cash available for distribution guidance. As of March 31, 2016, our available liquidity was $335 million, which consisted of approximately $91 million of unrestricted cash on hand, $27 million of restricted cash, $113 million available under our revolving credit agreement and $104 million available undrawn capacity under certain project to debt facilities. We believe this liquidity provides $100 million to $150 million in drypowder to drop down additional assets from Pattern Development. As Mike mentioned, we have established an aftermarket or ATM program to provide us with another mechanism to access capital. It’s a cost effective manner to raise incremental equity over time, providing greater flexibility than larger discrete equity or debt transactions. We will continue to manage our capital structure in a prudent fashion and dropping down projects when they are accretive, using cash available for distribution per share as our primary growth metric. Thank you. I will now turn the call back over to Mike Garland. Mike Garland Thanks Mike. First quarter was a great start to 2016. We recorded cash available for distribution of $41 million, our highest ever. We are on track for our 2016 cash available for distribution full year guidance. All 16 projects in the portfolio are now operational and they are performing at very high levels. We increased our dividend for the ninth consecutive quarter. Our identified right of first offer list of drop-downs from Pattern Development continues to be possibly advanced, and we anticipate additions this coming year. The outlook for the additional demand in all of our four regions for renewable energy is active and strong, and we believe the equity markets are starting to improve, which could allow for additional growth from accretive transactions. With this good news, we start 2016 in a strong position. Our list of ROFO assets will continue to grow in 2016, in a market with higher demand for renewables and improving technology. We have consistently delivered results based on our discipline and strategy, including our built-in cash available for distribution growth within the portfolio in 2016. We have a clear strategy to provide a growing and stable base of cash flows from a portfolio of high quality renewable assets. I’d like to thank our shareholders. We are very excited about our future. We have a plan for creating long term value for investors, changing the way electricity is made and transferred into developed countries, while respecting the communities and the environment where our projects are located. We’d like to now take your questions. Thank you. Question-and-Answer Session Operator [Operator Instructions]. Your first question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great, thanks. Good morning everyone. Mike Garland Hi Nelson. Nelson Ng Quick question on the drop-downs; I think in the MD&A, I am not sure whether I am reading it correctly, but rather than looking at projects that are already operational, are you guys seeing that you are looking to agree to do drop-downs for projects that won’t be complete until next year? Or is that just a potential? Mike Garland I don’t think we are trying to convey, that we are choosing between one or the other. I think we’d look at, whichever we think is the right acquisition at the time and which are accretive and which are ready to be dropped and appropriate for us. So our tendency today, is to be acquiring assets at or around commercial operation date, and we said — Pattern Development has set up financing arrangements and equity commitments, such that they can hold those assets through the construction period. So I don’t think that our MD&A meant to imply that we were planning on dropping down projects in construction over — in preference to assets that are in operation. Nelson Ng Okay. Thanks for the clarification. Then another question is on the timing of debt repayments, I think Q1 was a little bit lower than our expectations and I think in the annual report it indicated about $48 million will be repaid in 2016. Is that still the case, and will there be more or higher debt repayment in probably Q2 and Q4? Mike Lyon The $48 million is still the case for our principal payments during the year, Nelson. All of our projects have sort of sculpted principal payments that depend on the — or that are shaped, based on the expected shape of the project cash flows during the year. So some of them have higher principal payments in the first quarter, some have higher in the second quarter, etcetera. So they just vary from one project to the next. Nelson Ng Okay. And then, just one last question before I get back in the queue; in terms of the actual generation for the quarter, I guess, roughly, what percentage below the long term average, was it? Mike Lyon It was close to 10%. Nelson Ng Okay. Thanks. I will jump back in the queue. Thanks. Operator Your next question comes from Stephen Byrd with Morgan Stanley. Your line is now open. Stephen Byrd Hi. Good morning. Mike Garland Hi Stephen. Stephen Byrd Wanted to touch on the IRS rule changes with respect to wind development. I know you are not primarily in the development business. But I was just curious in terms of your reaction to the importance of the rule changes, and if there are any nuances in the rule changes that we should be thinking about. But just overall, in terms of the impact to wind economics, and sort of the run-rate for growth in wind? Mike Garland It was a great result and we were actively involved in it. There is really three elements that are very good for us; one is, they have taken the Safe Harbor from two years to four years, which means, that if you — for example, put your 5% or you buy turbines that — this year, you have four years to complete the projects rather than two; and so that extends out the period of time that we can do projects, make down payments, for examples on turbines and qualify them to allow projects, so we go into service in four years and still get 100% PTCs. Secondly, allows for bigger projects, because sometimes, those take longer than a year to two years to build. And third, they clarified exceptions, so if for example, you were building a project and the transmission line wasn’t fully operational, but the project was. We think we now have stronger support from the IRS that should still qualify, even if you — we are fully placed in operation in more than four years. So we thought it was really a — pretty outstanding result and it was one that we worked hard to try to support and give the evidence to the IRS and treasuries to allow them to make that conclusion. Stephen Byrd Great. And then shifting to the drypowder commentary that you laid out; I guess, you are in a good position, in the sense that you don’t have a near term need to do anything. You have good full year cash flows from your projects. But can you help us, in terms of thinking about the timing for when you might want to use that drypowder? Are there pros and cons you’re weighting. How should we sort of think about that decision-making process? Mike Garland Yeah, I guess, my reaction and I’d like Mike to add is, is what we do is, is we look at both the quality and the accretiveness of opportunities to acquire in using that money, and then secondly, just looking ahead at what kind of commitments we might make and might come up, such that we are doing just single-off planning that we are looking at how to grow our business in the coming years. And so, it’s really a combination to that. We don’t — obviously, it makes a difference where our stock price, to make sure its accretive. And so that’s the third element that we look at. Mike? Mike Lyon Yeah. One other factor that sometimes comes into play, Stephen, is that for project investments in the United States in particular, because we rely on the production tax credit, is an important part of the project economics. And because we therefore enter into transactions with investors who want to use the tax attributes of the project. Some of those tax equity oriented investors want to know when construction financing is closing, that Pattern Energy will be a long term owner of the interest in the project, as opposed to Pattern Development. And so, sometimes we will — and I would hasten to say, not all of such investors have that view, but some do. And so, sometimes, we will make forward commitments to acquire a project at the time of the beginning of construction. So that can be a factor in how we think about allocating our capital resources. Did that make sense, Stephen? Stephen Byrd That does make sense. I think just lastly, and I will get back in queue. Could you give us an update in terms of your approach to hedging Canadian dollar exposure just sort of current [ph] on where you stand on the hedge perspective? Mike Lyon Sure. We continue to use 18 to 21 months rolling program, where we forward purchase Canadian dollars. We entered into those Canadian dollar purchases, at the P75 level, at the front end, and then it tapers off towards the back end. And so what that means, is that over the course of the next 12 months, we have locked in a substantial portion of the FX impact that we could have for the next 12 months, and then it tapers off at the back end. And we just continually add on a new quarter, as we roll through the quarters. Stephen Byrd Understood. Slow and steady there, that makes sense. Thank you very much. Mike Garland Thank you, Steve. Operator Your next question comes from Chris Turner with JPMorgan. Your line is now open. Chris Turner Good morning guys. I wanted to get a little bit more of a sense, quarter-to-quarter this year with your CAFD results and how they compare to your full year guidance, and also kind of the same question on the adjusted EBITDA level, given the relative strength of the first quarter. So as we see kind of wind reverting back up to normal, as it is in your plan, and then kind of any partial recognition of projects coming online over the course of the first quarter, being at a full run rate in the second quarter and beyond. How can we think about that? You already kind of addressed some of the CAFD items in terms of debt prepayments and debt paydowns, but when we think about maybe adjusted EBITDA and that level, how does that look going forward? Mike Lyon So our portfolio at current, tends to have relatively similar quarters, Q1, Q2, and Q4, with Q3 being typically the weaker quarter, in terms of seasonality during the year. And that’s why you will see the — the $41 million that we reported today for first quarter, puts us on track for the full year guidance that we gave. As to adjusted EBITDA, it follows a similar kind of track. I think if you were asking about the — were you asking about the first quarter adjusted EBITDA, Christopher, or really just wanting to know how to think about it going forward? Chris Turner I guess, a little bit of both. How can we think about the first quarter in the context of the back kind of three quarters of the year? Mike Lyon Yeah. So the first — as they say, the seasonality tends to favor Qs one, two and four over Q3. We, as you noted, had a — or some might have noted, had a bit of a shortfall in Q1 adjusted EBITDA, relative to consensus, while we outperformed on cash available for distribution. And I think, that that’s a little bit of a reflection on the seasonality impacts, but also, that there is a little bit of a timing shift, when we received cash available for distribution from our unconsolidated investments, that could be really with respect to cash flows earned, if you will, at the project level in the prior quarter to some extent. And as you may recall, we finished Q4 pretty strong in terms of production at our Ontario projects, and helps drive the distributions from unconsolidated investments to a little bit higher level in Q1. Chris Turner Okay, got you. Mike Lyon I might have missed one of your questions there, but — Chris Turner No, that answered it. I also wanted to circle back on the El Niño kind of transition, potentially into La Niña and how you are thinking about that right now. You addressed it already and said that you continue to think that there is a chance of outperforming the average of [indiscernible] resource in the back half of the year, and you also kind of mentioned that it might spill into the first part of next year. But has anything changed over the last three months there, in terms of your expectations? Have they gotten stronger or are they basically the same? Mike Lyon No. I don’t think so our expectations have changed in the last few months. We still perceive the same kind of profile that we did earlier in the year at no — our Met team hasn’t given us any sort of changing guidance about that. Chris Turner Okay. And is there any way we can think about that quantitatively in terms of performance potential versus average? Mike Lyon No. as we said, factored into our own estimates for guidance for the year, and the assumption that we would be at the long term average for the second half of the year. Chris Turner Okay, great. Thanks. Operator This is the operator. We have a number of analysts still in the queue. If you would please limit yourself to two questions and then get back in queue, so management can answer as many questions as possible, that would be much appreciated. Thank you. Your next question comes from Ben Pham with BMO. Your line is now open. Ben Pham Okay, thanks. Good morning. I was wondering what the assessment is with respect to third party acquisitions and possibly, the drop down portfolio. What’s your assessment on the competition? I think you had a good track record, taking some assets up on the cheap from some bankrupt companies in your past, and just [indiscernible] some assets like that, you can shake loose right now and how do you think about that, relative to your balance sheet and maybe how you look at your ROFO drop-downs, would you drop down assets for good returns or look towards through the third party assets for abnormally attractive returns? Mike Lyon I think — just to take off your last comment, I think if we could find some really great acquisitions that are very accretive, because of unusual circumstances such as there is an urgency of a sale process or something, we would go out for that, before drop-down. But we have been paying attention to what’s out in the market. The market isn’t quite as robust. I think people are starting — wanting to still wait a little bit and see how it’s going. There has only been a few transactions. The first — Edison for example, is going through some liquidation of assets, selling of assets, I should say. And we are involved in looking at those. We will see what the pricing looks like, as time goes on. We are hopeful, we will be able to find a few above market, if you will, returning projects. But there is still a lot of competition, as you know out there, to acquire projects, especially operating projects. So it’s not like the market has fallen through the bottom. I think, where you get above market returns is when you — there is something unusual, like you may need a very fast turnaround, they may need — the seller may need a fast turnaround time. Those are the sorts of things that put us in a really good position, because we generally can move more quickly than a lot of people, or if it’s a little more complex, that we have all the skillsets in-house to be able to analyze projects and don’t have to rely on outside parties, experts to advise us. So we will be looking at the market as we go forward, but there is nothing currently active that we have, at Pattern Development or at PEGI. They are more of development assets on the market than operating assets sit currently and Pattern Development is very active looking at those opportunities and intends to expands on its backlog, both through Greenfield development, as well as acquisitions. Ben Pham Okay, thanks for that. And my second question is on your contract length you guys have, and I am just wondering. When you say strategy and you think about your business longer term. That contract length has come down quite a bit since the IPO and part of it is just time. But how do you guys think about that? Do you look at your PPA asset life and then you add — do you think about your — Mike Garland I think what we saw, was a little unusual; because we ended up doing a number of three, I think deals, that had hedges, which are shorter term transactions like Amazon and so on. But look at the identified ROFO list, they are all long terms. And if you get a combined existing portfolio plus the ROFO list, I think you’d find that the term length of the PPAs goes up substantially. So you might take a look at that, Ben. Ben Pham Okay. So it’s going to go up over time. Okay. Thanks everybody. Mike Garland Good luck. Operator Your next question comes from Frederic Bastien with Raymond James. Your line is now open. Frederic Bastien Good morning. I was wondering, if you could provide any updates on your partnership with Cemex in Mexico? Mike Garland Sure. Its going extremely well. We are actually seeing more progress than we had though, when we originally entered into it. And you probably know, that they did the first round of bids, and some of them were pretty aggressive. But candidly, our project wasn’t as far along as we’d like it to be. We were not shortlisted, but that wasn’t that problematic to us. Half of the reason was, because of the way the initial offering was offered, where there were some benefits and penalties depending on where you were located. The second round of bids that will be coming up this year, are more favorable to us than the first round and our project will be further along. So we think we can be quite competitive, and Cemex has been a great partner. They have been decisive, they have provided resources. They have good insight into the business and what’s going on locally and helping with landowners and other things. And so, we are very excited with the relationship right now. Frederic Bastien Okay, thanks. And if we move further down south to Chile, where you already have an offering asset and you have got the solar, Conejo Solar that is being developed. How is it competitive to the environment there? Any different? And whether you see some good opportunities for the development longer term? Mike Garland Yeah, it is. It’s clearly competitive in Chile. We think that there may be — I think the question in Chile is going to be more is, how robust is the distribution company, RFP processes that are coming up, because that’s where the best next resource for PPAs is going to come from. As you know, the copper market has slumped in the last several months or last year and so the mining companies are still actively looking for some more power, renewable power in particular. But they are not as active as they had started to be, a year or so ago. So we are looking at a combination of things. The RFP from the distribution companies, and one-off transactions from some of the mining companies is where we will get our growth there. Still a very interesting market, and that there is a high level of commitment to renewables and the price has come down enough to where it’s pretty hard to compete renewables — with renewables in Chile, and there are somewhat fewer competitors than say, in a place like Mexico. Frederic Bastien All right. That’s helpful. Thank you. Thanks Mike. Mike Garland You bet. Operator Your next question comes from Matt Tucker with KeyBanc Capital. Your line is now open. Matt Tucker Hi, good morning. Mike Garland Hi Matt. Matt Tucker So just wanted to clarify, the $100 million to $150 million you cited is not your total liquidity, but it’s the portion of your current liquidity that you’d be comfortable, using to make acquisitions right now. And would that be enough to do a larger drop-down, like Armow this year, where’d you need your share price to be at a level, where you could also — you’d also be comfortable issuing some equity to finance that? Mike Lyon It’s enough to do a large transaction, Matt. We could — depending on the size of the transactions, we could potentially do more than one. But it would be enough for a large-ish transaction. Certainly on the scale of those that we drop-down in the past. Matt Tucker Got it. And the $100 million to $150 million, that’s just the portion of your liquidity that you think is drypowder? Mike Lyon That’s correct. There are portions of that liquidity that are at project level. So we don’t think of that as being available for corporate acquisitions. We really look to the availability under our revolving credit facility, and the portion of our unrestricted cash that we’d be comfortable to begin to — for acquisitions. Matt Tucker Got it. Thanks. And then I just wanted to ask about your comments on PEGI potentially taking a stake in the development pipeline. Is there something that you continue to remind us about, I think, just about every quarter? But still seems like, it’s in its preliminary stages in terms of that decision. Is there anything that’s changed since last quarter? Or just anything new, we should be taking away from your comments today? Mike Garland No. I think you stated it fairly, that we keep kind of saying the same thing for the last couple of quarters. We don’t feel a rush to execute on the plan, and so, it has not been the priority. Our priority is our operating assets, and our internal organization, given the situation we are in with the market. And so we are taking it slowly, probably slower than we normally would. I think we are typically known as people, who move quickly and efficiently on this, when we just feel there is no reason to rush into it. And so, we are not trying to send any market messages with our comments, only to remind people, as you say, that we are still having those discussions, because people would ask otherwise. So as things develop and become more solidified with the option of what we might do, we will let you know. But right now, it’s still in the early stage discussion level. Matt Tucker Okay, great. Thanks guys. Operator Our next question comes from Sophie Karp with Guggenheim Securities. Your line is now open. Sophie Karp Thank you for taking my question. I was wondering if you could comment a little bit on the state of the tax equity market and you have done some deals there in the past, and what are you seeing now, with certainly, in current opportunities for you right there? Thank you. Mike Garland Yeah. I think it has changed a whole lot. I think the new guidance has actually been helpful to it. Maybe it’s a perspective some people wouldn’t share. But my personal belief is, is it — with the extension, IRS extension, what it will do is somewhat levelize the construction and demand for tax equity. And what I mean by that is, rather than rush everything to get done within the two year window, we can loose out the demand over the next four years and longer, as it steps down — the PTC stepdown, which I think helps; because the market has expanded a little bit in the tax equity, but not substantively, it’s about the same as it was last year. It’s still very strong. As I remember right, I think $13 billion of tax equity last year. Just a tinge over half of that was in wind. I can check on those numbers, but it’s a handful 10-12 investors who are the dominant players, and so, we’d like to see that market expand at some. But it’s still adequate for the demands at the tax equity markets today. Sophie Karp Thank you. And then on the funding strategy, I guess, when you talk about corporate revolver availability for acquisitions, what would be for you in that — the next step in that process? Would you seek to term it out in the next 12 months or so or how do you view that? Mike Lyon I think we would look at that, Sophie, more as part of our long term capital planning. We said at our Investor Day last summer, that we felt going forward, the significant amounts of capital that we expected to utilize over the next several years. We thought it would be very roughly, two-thirds common equity and one third debt. And so that would be a potential replacement of the revolver, over some period of time. I think we are very comfortable at carrying the revolver balance at this time. So we don’t have an immediate plan to do any sort of term out of that revolver. But in the long term, that’s pretty clearly, the right thing to do. Sophie Karp Thank you. Operator Your next question comes from Michael Morosi with Avondale Partners. Your line is now open. Michael Morosi Hi guys. Thanks for taking the question. First off, if we looked just on a — just a purely calculated basis, it looks like the dollar per kilowatt hour is declining as the portfolio grows, and I just wondered if you could talk a little bit about, the levels at which we should expect new assets to enter the portfolio? Mike Garland I think our average cost per kilowatt hour is really — like I mentioned earlier, about the term in the last year to — or last year. We tended to do the merchant deals in the high wind markets, where pricing has come down. But if you look at the next set of projects that we could drop, like Armow in Canada, has a very high PPA price. And so, it varies from year-to-year, month-to-month, quarter-to-quarter, depending on what’s dropped down, and where the projects are located. I think you will, and you should expect, a trending down of the price each year going forward, because the industry is just getting better and better. The cost of production per kilowatt hour, what it cost us to buy equipment and install it has come down so much, more than 65% over the last five years and so you are going to continue to see that trend, where we are trying to drive down costs, so we can be more and more competitive. So I think you will see the PPA prices going forward, continuing to drop. Even Ontario, for example, where Armow may have — I think with the base PPA of the old transactions, contracts in Ontario were $135, if you didn’t have — for example, the Aboriginal add [ph] and so on. But the new contracts are substantially below that or lower than that. So we think it’s a natural maturing of the industry that we can get — we can produce our power cheaper than we could last year, and therefore the new PPAs that benefit, will in large part, be passed on to the buyers of the power. Michael Morosi Very good. Thanks for that. And then, with respect to the 5 gigawatt by 2019, I wondered if you could just provide little more details around the expected geographic breakdown or the mix between wind and solar, and whether you anticipate that to substantially come from Pattern Development’s pipeline or elsewhere? Mike Garland Yeah. If you look at our current number of assets and our iROFO list we had in our last presentation, a graphic that showed the difference. And I think, we were short about, what was it, 1,500 megawatts? And so, the first half we just look at our iROFO list, and you will see its dominated by North America and Japan to some extent. And so that is pretty indicative of where it comes from or where we anticipate things locationally. We think the new projects too will come similarly in North America and some Japan, some from Chile, but the predominant amount of growth will come from North America. It will be dominated by wind. We will continue to push our efforts in solar, both abroad and domestically in the United States. But it’s going to be dependent on whether we can get good accretive solar transactions, that portion — to see if we can grow our U.S. portion of solar, relative to wind. So I guess what I would say is, North America will dominate — wind will dominate, and drop-downs will dominate as well. So majority of our portfolio will grow just as it is today, with a majority in the U.S., with wind. I used to say, 80-20, I still hope that we could do 80% wind, 20% solar over the next three to five years, but it could be less than that, if the markets stay really tight on solar. And I’d say the same thing about drop-downs, so probably about 80% drops. Michael Morosi Thank you. Operator Your next question comes from Rupert Merer with National Bank. Your line is now open. Rupert Merer Good morning. Thanks for taking the question. A quick follow-up FX question; with much of your ROFO now is in Japan, Canada and Chile, you could see increasing cash flows from outside the U.S. in the next few years. Would you consider, longer term, hedges on new projects to lock-in or returns in the drop-downs when you invest the capital? Mike Lyon Yes we would Rupert. I think in certain markets, we might well do that. Some of those markets that you mentioned, we are happy to observe that the power pricing can be U.S. dollar denominated. That certainly is the case in Chile. The Mexican solicitation also has been — had a U.S. dollar denominated attribute to it. Japan will clearly be Yen-based and we will look at a longer FX solution in Japan, as part of any investments we make there. Rupert Merer Okay, great. Thanks. And then secondly, so beyond accessing available liquidity for drop-downs; in your view, is the share price where it needs to be now at $20 for drop-downs to be accretive with the issuance of new equity? Of course, a lot of moving parts there, but if you take the difficult deal price today, do you think the transactions could be accretive? Mike Lyon Yes, I think they can be accretive. I think we prefer that they be more accretive. The spread between investment and the cost of the capital is, what we have our eye on. And so, as Mike said, we are not looking to issue shares at prices we have seen in our recent past. We think the trend, is in a good direction, and we put the ATM program in place, because it gives us the flexibility to take advantage of markets, when we think it’s appropriate to do so. Rupert Merer Okay, great. Thanks very much. Operator And your next question comes from Jeremy Rosenfield with Industrial Alliance. Your line is now open. Jeremy Rosenfield Yeah, great. Just a couple of questions here. So I just want to be sure that I am understanding completely, given the dry-powder that you are talking about, but the share price. So it seems like you have everything in place to make the next acquisition, and you are basically just, in the sort of a holding pattern right now. And I just want to make sure, that that’s exactly what you’re saying here? Mike Garland Yeah. I think that’s a fair way to describe it. Jeremy, we have talked in the past about the market as being pretty sensitive, or at least, it’s not as stable as we’d like to see. So you can make an argument that we could drop something today. But we have had the sense, and I think, we even in the last earnings call, talked about how there is a quality to the market, where it’s almost — the market doesn’t want to hear much new news at all. And so, what we are waiting for, is the market to stabilize a little better, so that people look at whatever we do very positively, because we want, obviously for our investors to see a positive outcome and a growth of that positive reaction to the marketplace. And sometimes announcing anything is perceived as not that good. People may not see it as accretive as it should be or timing isn’t right or raising any equity creates issues. And so, we are being patient and believe that the right approach ought to be just waiting till the market settles and feels a little more solidified than it has been, in order to make an acquisition. Jeremy Rosenfield Okay. And then, if you think about, let’s say the level of accretion that you would need in a transaction, I obviously understand different transactions, some could be more accretive some could be less. But do you have a target that you are thinking of, that you would like to get to, in terms of accretion for — in order to be able to move forward with the next transaction? Mike Lyon No I don’t think we have a specific, and we certainly don’t think it’s appropriate to talk specifics about an accretion target. It really depends on the size of the transaction, and how you are determining accretion, whether it’s the total accretion on all the shares or is it relative share of accretion. I think, most people look at it and say how much does it move the whole stock in terms of the accretion value, and that would say, you can’t do small transactions, that may be highly accretive on their own. So I just don’t think it’s useful to try to talk about accretive — less than accretive target. Jeremy Rosenfield Let me maybe just follow-up and just back differently; in terms of multiples that you are contemplating when you look at transactions, has that changed substantially sort of today from previous transactions that you have looked at? Mike Garland I wouldn’t say substantially. We are trying to be a little more aggressive and get better multiples. But I don’t think the market has changed substantially. At least, we haven’t seen enough transactions to say that it has changed. We have seen some that have been pretty high multiples, which is not where we want to go. We want to see the market come down and do a little lower pricing on acquisitions. And so, right now we think that our past is in far from what we think the low end of the market currently is, and we still hope we can do better than market. Jeremy Rosenfield Okay. Great. Thanks. Operator [Operator Instructions]. Your next question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great. Thanks. Quick question on Puerto Rico; I know I have asked in the past about it, but given the kind of more recent developments, I thought I’d ask again, whether you guys are being paid on time, and whether the counterparty have asked to, I guess, renegotiate or open up the contracts in terms of Saint Isabel? Mike Lyon We are being still paid on time, and they have not asked us to reopen the contracts. Our constitutional and contractual position remains the same as it has been since that project was conceived. Nelson Ng Okay, great. And then, one other thing, I noticed in the cash flow statement that Pattern received $61 million of cash collateral that you kind of set aside. Was that in relation to Gulf Wind or was it another project, and can you give any more color on that, other than the counterparty was downgraded, and I presume, that’s why they had to give you a cash collateral? Mike Lyon That’s exactly right Nelson. And it’s just the arrangement that was set out in the contract. The counterparty is still an investment grade counterparty, but there is a threshold in the contract that required that if they fell below that, they would post cash collateral. It’s held in a segregated account. It is not available to us for our general uses; and it will move around, as the market value of that hedge moves around. So we may send some of it back to them on a given week, and they may post additional collateral. So it just gets held in this segregated account, where it’s not comingled with our general cash balances. Nelson Ng Okay. And was it related to Gulf Wind or a different project? Mike Lyon Yes it was. It was Gulf Wind. Nelson Ng Okay, got it. Great. Thanks. That’s all I have for now. Thanks. Operator There are no further questions at this time. I would now like to turn the call back over to Mr. Mike Garland. Well thank you everyone for joining us today. Again, we thought it was a great quarter and the outlook for our business still is very robust, and we appreciate your interest in the company and your questions. Call us anytime. Thank you. Operator This concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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